Is the market size hypothesis relevant for Botswana? Vector error correction framework

Abstract

The current study investigated the relevancy of the market size hypothesis of FDI in Botswana in Botswana using the VECM approach with data ranging from 1975 to 2013. The study used FDI net inflows (% of GDP) as a measure of FDI and GDP per capita as a proxy of market size. The findings of the study are threefold: (1) observed that there exists a long run uni-directional causality relationship running from GDP per capita to FDI in Botswana, (2) there is no long run causality running from FDI to GDP per capita in Botswana between 1975 and 2013 and (3) failed to establish any short run causality either from GDP per capita to FDI or from FDI to GDP per capita in Botswana. Although, GDP per capita of Botswana was a conditional characteristic that attracted FDI, Botswana did not economically benefit from FDI net inflows during the period from 1975 to 2013. The findings defied the theory that mentions that FDI brings into the host country an improvement of human capital development and technology improvement among other advantages which boost economic growth. Possibly, there are other host country characteristics that Botswana needs to address if it hopes to benefit from FDI. The current study recommends further research to find out which are the other conditional characteristics that Botswana authorities need to put in place in ensure that FDI inflows is translated into economic benefits for the country.